Kingsway Group Limited (formerly known as Willis & Bowring Mortgage Investments Limited) v Belramoul
[2009] NSWSC 608
•8 July 2009
CITATION: Kingsway Group Limited (formerly known as Willis & Bowring Mortgage Investments Limited) v Belramoul & Ors [2009] NSWSC 608 HEARING DATE(S): 29 April 2009, 30 April 2009, 1 May 2009, 1 June 2009
JUDGMENT DATE :
8 July 2009JUDGMENT OF: Schmidt AJ CATCHWORDS: MORTGAGES - mortgages and charges generally - rights and liabilities of mortgagor and mortgagee - mortgagee's possession and sale - no claim arising claim under section 420A of the Corporations Act 2001 (Cth) - mortgagee's breach of duty - whether mortgagee failed to act in good faith, unfairly and unconscionable sacrificing the mortgagor's interest in the property - whether mortgagee failed to preserve property - whether mortgagee failed to market property - whether mortgagee failed to engender competition - mortgagee's failures not established - orders sought granted LEGISLATION CITED: Corporations Act 2001 (Cth)
Uniform Civil Procedure Rules 2005CATEGORY: Principal judgment CASES CITED: Artistic Builders Pty Limited v Elliott and Tuthill (Mortgage) Pty Limited 10 BPR 19,565
Barns v Queensland National Bank Limited and Anor (1906) 3 CLR 925
Commonwealth Bank of Australia v Hadfield [2004] NSWCA 350
Hawkesbury Valley Developments Pty Ltd v Custom Credit Corp Ltd (1994) 8 BPR 15,581
Jenkins v National Australia Bank Limited [1999] VSCA 3
Jeogla Pty Ltd v Australia and New Zealand Banking Group Ltd (1999) 150 FLR 359
Pendlebury v The Colonial Mutual Life Assurance Society Ltd (1912) 13 CLR 676
Reinehr Industrial Lease and Finance Pty Ltd v Jordan (Unreported NSWCA, 4 June 1974, Street ACJ, Hardie and Glass JA)
Westpac Banking Corporation v Kingsland (1991) 26 NSWLR 700PARTIES: Plaintiff - Kingsway Group Limited (formerly known as Willis & Bowring Mortgage Investments Limited)
First Defendant - Nabil Belramoul
Second Defendant - Suzanne Wendy Belramoul
Third Defendant - Daryl Kenneth BadmanFILE NUMBER(S): SC 10266/06 COUNSEL: Mr C Harris, SC - Plaintiff
Mr D Brogan, counsel - DefendantsSOLICITORS: Willis & Bowring Solicitors - Plaintiff
Websters - Defendants
SCHMIDT AJIN THE SUPREME COURT
OF NEW SOUTH WALES
COMMON LAW DIVISION
Wednesday, 8 July 2009
JUDGMENT10266/06 - KINGSWAY GROUP LIMITED (FORMERLY KNOWN AS WILLIS & BOWRING MORTGAGE INVESTMENTS LIMITED) v NABIL BELRAMOUL & ORS
1 HER HONOUR: The plaintiff filed its statement of claim in January 2006, seeking orders in respect of moneys due under a loan agreement, secured by a registered mortgage over property situated at Mosman, following the defendants' failure to pay interest due under the loan. The defence raised claims of waiver or estoppel, the plaintiff having earlier obtained possession of the land and alternatively, that the proceedings were an abuse of process.
2 By judgment of 31 August 2006, the defence was struck out as disclosing no reasonable defence and judgment in favour of the plaintiff in the sum of $2,508.489.03 was entered, with an order for costs in favour of the plaintiff.
3 By motion of August 2007, the defendants sought orders setting aside the 2006 judgment and allowing them to file a further defence. Part 36 of the Uniform Civil Procedure Rules 2005 grants the Court a discretion to set aside the judgment.
Reasons for granting the orders sought in the defendants' motion
4 The matter was listed for hearing of both the motion and the plaintiff’s case, in the event that the motion was successful. During the course of the hearing, I announced that I would grant the defendants’ application, for reasons which I would give later. These are those reasons.
5 Consideration had to be given to the circumstances in which the defendants’ original defence came to be struck out and judgment entered for the plaintiff, without a hearing on the merits; what the proposed defence sought to raise; as well as the strength of the case which the defendants wished to advance. At that stage, however, the Court was not concerned to determine the truth, or otherwise, of that defence. (See Reinehr Industrial Lease and Finance Pty Ltd v Jordan (Unreported NSWCA, 4 June 1974, Street ACJ, Hardie and Glass JA)).
6 The original loan advance was for $1,990,000, repayable in September 2004. The loan was not then repaid, nor has it been since. The plaintiff commenced proceedings in January 2005, seeking possession of the property. Judgment for possession was given in May 2005, but the plaintiff did not go into possession until October.
7 The defendants were living in part of the Mosman property, their family home, before the plaintiff took possession. The defendants intended to redevelop the property and had obtained a development consent from the Council, which would have permitted the development of three strata title units on the property, comprising two penthouses and a three bedroom apartment.
8 It was Mr Belramoul’s evidence that in January 2004, the plaintiff obtained a valuation of the property for $3 million. The defendants were then seeking to refinance their borrowings. Mr Belramoul discussed further refinancing and a construction loan with a Mr Grahame Smith, a broker who represented the plaintiff. Mr Smith advised that the plaintiff should be able to provide a construction loan, once the building application was approved, as well as refinancing. In March 2004, the defendants entered the loan agreement, in order to refinance their pre-existing borrowings. The loan was secured by a mortgage in favour of the plaintiff.
9 In September 2004, Mr Smith advised that the plaintiff would not provide a construction loan. In December, Mr Belramoul advised Mr Smith that the defendants were unable to obtain a construction loan and that they would have to sell the property. Mr Smith advised him that only the mortgagee could sell the property, even though the plaintiff did not obtain possession until 2005. The defendants were seeking alternative finance during this time, which they did not obtain.
10 There were ongoing negotiations between the parties and the defendants paid the plaintiff $100,000 in July 2005, to give the defendants an opportunity to refinance. Those efforts failed. Mr Belramoul himself then made efforts to sell the property, which failed to secure a buyer. In December 2005 the property was put up for auction by the plaintiff, it being advertised as being sold under instructions from the mortgagee. Mr Belramoul was told that an offer was made for an amount of $1.8 million, but it was not accepted by the plaintiff. Mrs Belramoul gave evidence to similar effect.
11 There were subsequent attempts by the defendants to sell the property, which also failed to produce a sale. The property was not sold by the plaintiff until late 2006, when it was sold for $1.625 million to the second mortgagee, without further auction, or any other marketing or sales activity. In December 2007, the second mortgagee sold the property for $1.7 million.
12 These proceedings were commenced in January 2006. The defendants were then legally represented. They filed a defence and a motion seeking that the proceedings be struck out. The plaintiff filed a motion seeking that the defence be struck out and that judgment be given in its favour. In June 2006, the defendants’ solicitor ceased acting for them. Messrs Willis and Bowring, the plaintiff's solicitors, thereafter dealt direct with the defendants.
13 On the evidence, there was no question that correspondence was sent to the defendants by the plaintiff’s solicitors, advising them of the hearing of the two motions in August 2006. The defendants did not appear at the hearing and the motions were heard in their absence, with the result that the defence was struck out and judgment was entered against them. The defendants were then still dealing with Mr Smith. It was Mr Belramoul’s evidence that Mr Smith had advised him that the plaintiff was negotiating a sale for a price which would leave the defendants owing no money. He assured Mr Belramoul that the hearing of the motion would be adjourned.
14 There was an issue between the parties as to whether the defendants’ evidence as to these matters could be believed, given what seemed to be somewhat conflicting evidence given by Mr Belramoul and Mrs Belramoul, and how Mr Belramoul appeared to contradict himself, in cross examination. This controversy had to be considered in the light of other evidence.
15 It was the defendants’ evidence that it was not until they were served with a bankruptcy notice in August 2007, that they became aware that the motions had been heard and that judgment had been entered against them. There was no evidence that the plaintiff, or its solicitors had advised them as to what had occurred at the hearing in August 2006. While there was correspondence beforehand, there was no evidence of advice having been given about what had transpired at the hearing. The defendants did nothing about the judgment until 2007, when they responded with alacrity to a bankruptcy notice served upon them, instructing solicitors and putting on this motion.
16 The upshot of all of the evidence was that it was quite apparent that neither Mr nor Mrs Belramoul paid sufficient attention to their affairs in 2006. Mrs Belramoul explained that her family had been evicted in October 2005, when she had a young child. While she had regular conversations with Mr Smith about what was happening with the property at that time, she claimed not to have read correspondence from the plaintiff which advised about the hearing of the matter, which was addressed to her and her husband, because she had left what was happening with the mortgage to him. She could not deny having had a conversation referred to in one letter, with someone from the plaintiff’s solicitors, but otherwise did not recollect reading various correspondence sent to the defendants at the time.
17 Mr Belramoul did not deny having received that correspondence, which he thought he had shown to his wife, yet he claimed that Mr Smith had told him that the hearing of the motions would not proceed. That was inconsistent with the advice being given by the plaintiff’s solicitors in correspondence, but Mr Belramoul took no steps to confirm with them that his understanding was correct.
18 It followed that the defendants’ explanation of how it came to be that judgment was entered against them without a hearing on the merits was not a particularly good one. They were on notice of the hearing, but did not appear, Mr Belramoul having made no enquiries to ensure that his understanding from Mr Smith, that the hearing would be adjourned, was correct. That the defendants did not know what had happened at the hearing until the time that the bankruptcy notice was served upon them, was, however, consistent with the evidence.
19 What also had to be considered was what was sought to be raised by the defence which the defendants wished to advance.
20 That defence raised allegations that the property was not marketed properly by the plaintiff and that sufficient steps were not taken to effect a sale in December 2005, when an offer of $1.8 million should have been accepted. It was also claimed that the plaintiff had wilfully disregarded the defendants’ interests as mortgagors, by failing to pursue the sale of the property by auction or otherwise after December 2005, thus allowing substantial interest to accrue under the loan, as well as allowing the property to fall into disrepair, to the defendants’ considerable detriment. It was not until late 2006, that the property was sold to the second mortgagee for some $1.625 million, at less than market value, not at the best price reasonably obtainable in the circumstances. The second mortgagee then sold the property in 2007 for a higher price of some $1.7 million. The circumstances established that the plaintiff was reckless and careless in obtaining a fair price for the property.
21 The parties both relied on the Court of Appeal’s judgment in Commonwealth Bank of Australia v Hadfield [2004] NSWCA 350 at [10]-[14], where it was observed, as to a mortgagee’s obligations on sale, that:
- 10 A sale in good faith would fall within the following formulations in judgments in the High Court of Australia, collected in Lacey v. Bank of New Zealand by Handley JA:
- There is a clear line of Australian authority on the duty of a mortgagee in exercising a power of sale. In Pendlebury v Colonial Mutual Life Assurance Society Ltd (1912) 13 CLR 676, the High Court held that the duty was to act in good faith and the mortgagee must not act wilfully or recklessly sacrifice the interests of the mortgagor. See per Griffith CJ at 680, per Barton J at 695, and per Isaacs J at 701-2.
The matter was further considered by the High Court in Australian and New Zealand Banking Group v Bangadilly Pastoral Company Ltd (1977-78) 139 CLR 195, where Jacobs J said:
- "It is true that bona fides in this connection is not concerned with the motive for exercising the power of sale but, once a decision to sell has been made it is concerned with a genuine primary desire to obtain for the mortgaged property the best price consistently with the right of a mortgagee to realise his security”. Ibid at 201.
- "To take reasonable precautions to obtain a proper price is but a part of the duty to act in good faith. This duty to act in good faith falls far short of the Golden Rule and permits a mortgagee to sell a mortgaged property on terms which, as a shrewd property owner, he would be likely to refuse if the property were his own”.
- ”... there is no obligation upon a mortgagee to exercise a power of sale if it does not wish to do so ...
- ... there is no duty owed by a mortgagee to a guarantor to exercise the power of sale at any point in time The mortgagee may exercise its power of sale ... when it so chooses”.
- What matters is the underlying equitable principle, which in the modern idiom usually finds expression in terms of unconscionability. The mortgagee is not answerable for what Isaacs J in Pendlebury describes (at 700) as “mere negligence or carelessness in carrying out the sale”. Any departure from reasonable standards must be so serious as to be properly characterised as unconscionable, in order to render the mortgagee accountable. If a failure by a mortgagee to take reasonable steps to obtain a proper price is sufficiently serious to be characterised as unconscionable as that expression is understood in equity, then in the taking of accounts between the mortgagee and the mortgagor, the mortgagee will be accountable on the basis of wilful default for the price which would have been obtained if the mortgagee had not been guilty of unconscionable conduct.
- [16] The mortgagee is entitled to sell the mortgaged property as it is. He is under no obligation to improve it or increase its value. There is no obligation to take any such pre-marketing steps to increase the value of the property as is suggested by the claimants…
[17] The mortgagee is free (in his own interest as well as that of the mortgagor) to investigate whether and how he can ‘unlock’ the potential for an increase in value of the property mortgaged (eg by an application for planning permission or the grant of a lease) and indeed (going further) he can proceed with such an application or grant. But he is likewise free at any time to halt his efforts and proceed instead immediately with a sale.
- The mortgagee, when the permitted time arrives, is not bound to wait for his money, merely because the mortgagor might profit by delay. And as ex hypothesi he is engaged in a lawful endeavour to get back money which is overdue, he cannot be expected to further increase the advances of the mortgagor by expending further sums for his sole possible benefit, in the shape of a higher surplus price. A prudent owner might well risk considerable outlay in order to secure a possibly enhanced return. But the mortgagee is not called upon to do this, without express stipulation to that effect. He would get no advantage from the outlay beyond the amount of his debt, and he might end in increasing that.
But if a further outlay is in the circumstances reasonable, and apparently necessary and prudent to conserve the mortgagor's interest, and to prevent his residual property being sacrificed, and if, having regard to what a cautious man would consider the total selling value of the property, it is manifestly safe, the mortgagee is, in my opinion, not justified in refusing to make or incur it merely because he can get enough for himself without it. It must, however, be safe; if it is not, the mortgagee would be taking risks for the benefit of the mortgagor which he is not called upon to do; if it is, he is merely using part of the mortgagor's own property to preserve the rest. Neglect in such circumstances would be manifestly improvident and would afford cogent evidence upon which a tribunal would be at liberty to think, and probably would think, the neglect reckless or wilful.
22 Clearly, the defence which the defendants wished to advance faced certain hurdles, given the authorities. In this case, it was not a hasty sale about which complaint was being made, but a failure to accept an offer; a subsequent failure to pursue the sale of the property, while allowing the property to fall into disrepair; and a much later sale to the second mortgagee, at less than a fair price.
23 Given what the High Court observed in Pendlebury v The Colonial Mutual Life Assurance Society Ltd (1912) 13 CLR 676, a failure to outlay what was necessary to prevent the property becoming unsecured, rodent infested, with overgrown grounds and various structural problems, including a fallen wall and stairs, may well have been an outlay which the plaintiff was obliged to undertake, if its obligations to the defendants were to be met. Whether the plaintiff had satisfied its obligations to sell for a fair price, also arose to be considered, given that a property which had a valuation of $3 million in 2004 was sold to the second mortgagee for $1.625 million in late 2006, a lower price than had been offered on the open market in late 2005. The second mortgagee later on sold the property, for a substantially higher price.
24 It followed, it appeared to me, that it could not be concluded that the defences which the defendants wished to advance were hopeless, indeed there appeared to be a real basis for advancing those defences, on the defendants' evidence. In the circumstances, justice demanded that the defendants be given the opportunity sought.
The parties’ cases
25 The defendants’ case was that the evidence established that the plaintiff had failed in its duty to act in good faith; had wilfully and recklessly sacrificed their interests as mortgagors and that it had failed to take reasonable precautions to obtain a proper price for the property. These failures were unconscionable.
26 The law was clear. The plaintiff’s obligation as mortgagee was to exercise the power of sale in good faith, for the purpose of obtaining payment of the mortgage debt. Wilfully and recklessly dealing with the property in a manner that sacrificed the interests of the mortgagor was not to act in good faith (see Barns v Queensland National Bank Limited and Anor (1906) 3 CLR 925 at 943). In Pendlebury, Griffith CJ explained the duty at 680:
... in the case of a sale by a mortgagee, if he omits to take obvious precautions to ensure a fair price, and the facts show that he was absolutely careless whether a fair price was obtained or not, his conduct is reckless, and he does not act in good faith.
27 A failure to preserve the property, with the result that it is later sold at an undervalue, involves a breach of a mortgagee’s duty (see Jenkins v National Australia Bank Limited [1999] VSCA 33.)
28 The plaintiff’s conduct was unfair and unconscionable. But for that conduct, a price significantly higher than $1.625 million would have been achieved. A breach of s 420A of the Corporations Act 2001 (Cth) was also pressed, it requiring the plaintiff to take all reasonable care to sell the property for its market value. (Jeogla Pty Ltd v Australia and New Zealand Banking Group Ltd (1999) 150 FLR 359).
29 A declaration was sought that the defendants had suffered a financial loss, which, but for the plaintiff’s breach of its duty of good faith, would not have occurred. The plaintiff’s claim should be diminished by reason of that loss. The loss would be calculated on the basis that the sale price of $1.625 million was an undervalue and that the true value was the reserve price fixed by the plaintiff at the 2005 auction, consistent with its then advice that the property was worth $2.2 to 2.4 million. There was no evidence which showed that this valuation was inaccurate. It was a compelling basis upon which the plaintiff ought to have conducted a supplementary marketing strategy in 2006.
30 In any event, what was critical was whether the plaintiff had pursued a fair and proper price by the process it had adopted (see Artistic Builders Pty Limited v Elliott and Tuthill (Mortgages) Pty Limited 10 BPR 19,565 [126] at 47.) The evidence showed that thereby, the plaintiff failed in its duty to secure a fair and proper price for the property. The valuations showed that it was worth significantly more than $1.625 million, for which it was sold to the second mortgagee on very favourable terms. Failing to offer another interested purchaser, Mr Donaghay, similar terms and failing to negotiate with the second mortgagee, once Mr Donaghay’s interest became known, was also a failure to stimulate necessary competition, as discussed in Jeogola.
31 The plaintiff’s case was that there was no dispute as to the applicable law, but that the evidence showed that it had acted in accordance with its obligations to the defendants.
32 The physical condition of the property was of no significance to its value. As the defendants conceded, its value was increased by the development proposal, which required the demolition of the building on the property. In any event, while a mortgagee in possession was not obliged to maintain a property, the evidence showed that steps were taken to maintain it. This was not a case such as that considered in Jenkins, but even there, the Court assessed the value of the chattels removed, thereby assessing the loss suffered by the mortgagors as the result of the failure to protect the property and reduced the mortgagors' liability, to that extent. Here, the defendants had not established the value of the property at the end of 2006, when it was sold, thus there was no basis upon which any such quantification could be made.
33 The evidence also established that the property had not been sacrificed; that the plaintiff had acted in good faith at all times and that the property was sold for its market value. While the original valuations which the plaintiff obtained in 2005 proved to be inaccurate, at the time, the plaintiff was entitled to rely on them. Efforts were made to sell the property in 2005 and throughout 2006, through negotiations with various parties. Further valuations obtained in 2006, as well as other advice which the plaintiff received was that the value of the property and its expected sale price was some $1.5 million. The property was sold to the second mortgagee for $1.625 million. There was no purchaser willing to pay more. The fact that the property was sold for $1.7 million some twelve months later, was of no significance. There was no evidence as to what had occurred to the property, or the market, in that time.
34 The property was never worth more than the defendants owed the plaintiff. Even if there were some breach, which reduced the amount received on the sale, the shortfall would not have been sufficient to discharge the defendants’ obligations to the plaintiff. In December 2005, the debt stood at over $2.2 million. When the bankruptcy notice was issued in August 2007, after the sale of the property for $1.625 million, there was still over $886,000 owing.
35 The plaintiff sought an order for what was owing on 1 May 2009, $1,179.744.97, plus interest and costs.
Consideration
36 It is convenient to deal immediately with the claim under s 420A of the Corporations Act. It deals with the obligations imposed on a controller of property of a corporation. The property here in question was not that of a corporation and accordingly, as the plaintiff submitted, there can be no question that the section did not impose any obligations on the plaintiff. Accordingly, there is no need to further consider the arguments advanced on that basis.
37 It is well settled that a mortgagee in possession is not obliged to sell at any particular time and that the failure to sell at a particular time, cannot constitute a breach of the mortgagee’s duty. (See Westpac Banking Corporation v Kingsland (1991) 26 NSWLR 700.) That is of some moment to a consideration of the competing claims in this case. The plaintiff sold the property to the second mortgagee in late 2006 for $1.625 million. While the defendants had claimed in their evidence that the plaintiff had received, but rejected, an offer for $1.8 million at auction in December 2005, that was not established. The evidence also showed that despite negotiations with various interested parties during the course of 2006, the only offer capable of acceptance which the plaintiff ever received for the property was that from the second mortgagee, which it accepted.
38 In that context, did the defendants establish that the plaintiff acted unfairly and unconscionably towards the defendants and failed in its duty to act in good faith, by wilfully or recklessly sacrificing their interests? There were three particular aspects to the defendants’ complaints. Firstly, that the plaintiff allowed the property to fall into disrepair; secondly, that it failed in its marketing efforts, after the December 2005 auction; and thirdly, that it accepted a price from the second mortgagee, which sacrificed the defendants’ interests. What was discussed in Hadfield, by reference to the decision of Isaacs J in Pendelbury, earlier quoted, is of particular relevance to these claims, to which I now turn.
The state of the property
39 In Hadfield it was observed at :
- But if a further outlay is in the circumstances reasonable, and apparently necessary and prudent to conserve the mortgagor's interest, and to prevent his residual property being sacrificed, and if, having regard to what a cautious man would consider the total selling value of the property, it is manifestly safe, the mortgagee is, in my opinion, not justified in refusing to make or incur it merely because he can get enough for himself without it. It must, however, be safe; if it is not, the mortgagee would be taking risks for the benefit of the mortgagor which he is not called upon to do; if it is, he is merely using part of the mortgagor's own property to preserve the rest. Neglect in such circumstances would be manifestly improvident and would afford cogent evidence upon which a tribunal would be at liberty to think, and probably would think, the neglect reckless or wilful.
40 There was a controversy as to the state of the property when it was vacated by the defendants and whether, subsequently, it fell into disrepair, but there was no issue that the property was of more value as a development site, than as a residential property. The defendants had increased its value by the development approval which they had obtained. It was their intention to redevelop and they were seeking funds for that purpose. The redevelopment would have required the demolition of the buildings on the property. It was also uncontested that the property was more valuable, if sold by the plaintiff in a single line for redevelopment, rather than selling the two strata units separately.
41 The valuation which the defendants obtained from Smart Valuation Services Pty Ltd in February 2004, was for $3 million. It stated that the older style residential building, a circa 1920’s two storey residential building comprising two strata units, was to be demolished and removed prior to construction works and was thus ignored, for the purpose of the valuation.
42 In April 2005 another valuation was obtained from All Real Estate Services Pty Ltd. This valuation noted that there had been no internal inspection, but that ‘overall presentation and condition of dwelling is sound and I noted no major items of maintenance on my inspection’, and later, ‘[t]he overall condition and presentation of the current building is average for the age of the building. Construction of the new development has not yet commenced.’ This valuation noted a softening of the market, but again, market value was assessed at $3 million, on the basis of an assumption that the development was undertaken in the immediate future; that the property was not ‘landbanked’ and that the quality of the construction was ‘to a very high standard’. It was warned that retention of the property for an extended period of time was likely to lead to a lower site value.
43 The defendants lived in one unit before the plaintiff took possession and the other was rented out. Undoubtedly, the units were each then habitable. They were vacated when the plaintiff took possession in October 2005.
44 In their evidence the defendants claimed that the state of the property deteriorated significantly, after the plaintiff took possession.
45 It was initially Mrs Belramoul's evidence that from six to twelve months after the auction in December 2005, she visited the property about five times. It was vacant and deteriorated over time. Mrs Belramoul agreed that when the defendants vacated the property, it required cleaning and maintenance, but she did not agree with the description of the property in a valuation report obtained by the plaintiff in November 2005, that it was in poor condition and required considerable maintenance work.
46 When it took possession, the plaintiff obtained a valuation from Smart Valuation Services Pty Limited, in order to determine a reserve price for the December 2005 auction. The plaintiff was advised that value levels and demand had diminished in the area in the previous 12 to 18 months. The property was inspected in November 2005 and it was then valued at $2.1/$2.2 million. The state of the property was described. In summary, it was noted that the two apartments were ‘in relatively poor condition with considerable maintenance works considered necessary’, which were then outlined in detail. No problems with any fencing was noted.
47 The defendants did not agree with all of what was there described to be the state of the property, but I am satisfied that no reason to doubt that description was established. All of the evidence suggests that given the defendants’ intention to redevelop the property, while the property was habitable in late 2005, it was in the state described in the November 2005 valuation. Mr and Mrs Belramoul agreed with it in part and relied on the valuation itself, as the foundation for the orders which they here seek.
48 When the property did not sell at auction and all marketing activities failed to result in any offers being made for the property, the plaintiff obtained another valuation, In May 2006, Woodbury Bell Pty Limited assessed the current market value of the property, with development approval, to be $1.5 million. The valuer did not provide details of the condition of the buildings, considering the development application, the condition of the dwellings and the underlying zoning.
49 Given the significant decrease in value, the plaintiff obtained another valuation report in June 2006 from Landsburys Property Pty Ltd. Photographs taken on 26 May were in evidence. They appear to accord with the description of what was observed in November 2005, by Smart Valuation and not how the property was described by the defendants. Again, given the proposed redevelopment, the condition of the improvements in the property were not described in the valuation, but the buildings were noted to be in a poor state of repair and their general condition and presentation was noted to be of poor quality and likely to require ongoing repair and maintenance. That description accorded with what the photographs showed. Current market value was assessed to be $1.56 million.
50 Mrs Belramoul's evidence was somewhat difficult to follow. Initially it was Mrs Belramoul's evidence that when she visited the property she noticed that a retaining wall had collapsed, which took a long time to repair, but it was repaired before the property was sold. Some of it had fallen into the adjoining property, upsetting the neighbour, who complained both to her and Council. A light in the front had fallen, as had a staircase at the rear of the property, pipes had fallen and the ‘house was falling down’. Initially the grass was high and by the end of 2006, the grass was waist high. The property was mice infested. On at least one occasion she found the front door open and a back sliding door ajar. When she went in, she found that a kitchen sink was missing, and the place had not been cleaned, it was dusty and dirty. Mrs Belramoul agreed, nevertheless, that the state of the property did not impede her efforts to introduce buyers to the plaintiff.
51 Mrs Belramoul's evidence suggested that she had first visited the site in July 2006 and that between then and the end of the year, she had visited about five times. It was during this period that she observed the wall to have fallen down. When shown the photographs taken in May 2006, which formed part of the Landsburys Property valuation, however, her evidence was that the wall had fallen down earlier and that it must have been repaired before the photos were taken. There was further exploration of this topic, with the result that it finally became Mrs Belramoul's evidence that the wall did not collapse until late in 2006 and then it took a long time to repair. The plaintiff sold the property in December 2006, with a settlement in February 2007.
52 When taken to the May 2006 photos, Mrs Belramoul also explained that in July she observed the property to have been in quite a different state, with the grass overgrown, garbage blown in from the street, and dirt and leaves everywhere.
53 Having considered Mrs Belramoul's evidence, particularly having in mind her explanation of what the photographs taken at the end of May 2006 showed and how they differed from what she observed when she first visited, I have come to the view that she must have somewhat overstated the state of disrepair in which she found the property. Her attempts to explain what the May photographs showed, given her earlier descriptions of what she had found when she first visited the property, made this quite clear. That it was possible for the state of disrepair which she had earlier described to have come about within a period from the end of May to July, seems quite improbable.
54 Mr Belramoul could not remember when he visited the property in company with a real estate agent. He could only say that it was before it was sold in 2007. They went inside, where in one unit he found that the carpet had deteriorated, there were mouse droppings and mouse traps on the floor. A sink was on the floor and the place was dirty and smelly. The windows were dirty, the stairs to the backyard were unsafe and the garden overgrown. The other unit was in a similar state inside and the other stairway was completely off the wall. There was also damage upstairs to the wall between the properties, where there was a large hole, big enough to get through and damage to paintwork.
55 The photographs taken in May 2006, also did not support the description of what Mr Belramoul had observed. It follows that the deterioration which both he and Mrs Belramoul described, can only have occurred later in 2006.
56 Mr Smith had the day to day responsibility for the plaintiff’s dealings with the property. His evidence was that he had visited the property some six to nine times between December 2005 and February 2007, about every two to three months, including after the second mortgagee made its offer in September 2006, when he visited the property with its valuer. When the plaintiff took possession it was in a poor and rundown state. The gardens were overgrown, carpets were dirty and there was evidence of termite damage. The staircase and balcony were in disrepair, and woodwork and paintwork had deteriorated. He did not, however, observe that the property had later deteriorated, as the defendants had described in their evidence. The property was marketed as a development site. A broken window was replaced in March 2006. The property was locked and the plaintiff engaged a gardener, to cut the grass and prune and maintain the garden. That evidence was consistent with what the May 2006 photographs showed.
57 The only real corroboration of the defendants’ evidence came from two documents, one a letter written on 28 November 2006 by the Council, regarding long grass on the verge in front of the property and the other, a letter written on 30 January 2007 by a neighbour who complained about the neglect of the nature strip outside the property and the unkempt condition of the entrance and carport.
58 Even if the evidence of Mr and Mrs Belramoul is accepted as fairly describing the state of the property in the latter half of 2006, still, there was no evidence from which it could be concluded that the state of the property had any impact on the price for which it was sold by the plaintiff in 2006, or that it deterred, or affected, any other interested purchasers, before it was sold to the second mortgagee.
59 There was certainly no evidence that the defendants ever raised any concerns with the plaintiff about the state of the property, even though they were in constant contact with Mr Smith, visited the property and, on their evidence, were relentless in their pursuit of a purchaser, throughout 2006. The state of the property does not appear to have been of concern at that time.
60 There were a number of other potential purchasers with whom the plaintiff negotiated in 2006. While only one offer finally emerged, the evidence did not suggest that any of the interested parties had any concern about the state of the property, consistently with the evidence that it was being sold as a development site.
61 In considering this part of the defendant's case, the observations in Jenkins, may not be overlooked. There, it was observed at [27]:
It does not follow from this statement of the obligation, of course, that the cost of taking those reasonable steps to obtain the best price is necessarily the measure of the loss sustained by a mortgagor when the mortgagee, in breach of its duty, fails to take those steps; nor did her Honour suggest that it was so. Where a mortgagee fails to take reasonable steps towards obtaining on sale the best price for the mortgaged property, the loss to the mortgagor is to be measured, at least prima facie, by reference to the price that would have been obtained had those reasonable steps been taken - and that may or may not be equal to the cost of taking those steps. It may be more or less; many home renovators have discovered to their cost that the expense of renovations is not always immediately recoverable on sale. And yet an assumption that the costs of restoration must have brought about a product of greater value than is suggested by simply adding those costs to the purchase price (of $275,000) seemed to me to underlie the guarantors' complaint in this instance that the trial judge erred by looking to those costs of restoration as a basis for assessing the loss suffered by the guarantors, instead of more conventionally to the probable selling price had the property not been allowed to deteriorate in the first place.
62 What the cost of the maintenance work, which the defendants complained was not undertaken by the plaintiff, might have been, was not addressed in their case. Nor was it established that had it been undertaken, a higher price would have resulted. On the evidence, I am unable to be satisfied that it was the result of any failure by the plaintiff to maintain the property, as it was obliged to do, which resulted in the second mortgagee being the only one who made an offer for the property, or that such a failure resulted in a price, which sacrificed the property, contrary to the defendants' interests. Nor did the price for which the second mortgagee sold the property some 12 months later, lend any support to this complaint. There was no evidence as to the state of the market at that time, the terms on which the property was then sold, or what, if anything, had been done with it in the meantime.
The plaintiff’s marketing efforts
63 The defendants also complained that the plaintiff failed to properly market the property. This complaint was directed to the period after March 2006.
64 In 2005, James Lyndsay Real Estate gave the plaintiff an estimate of value of the property at $1.4 million to $1.5 million and in November, Ray White Neutral Bay estimated $2.2 million to $2.4 million. The plaintiff then also obtained a valuation of the property at $2.1/$2.2 million from Smart Valuation Services. It appointed Ray White Neutral Bay as its agent and fixed a reserve of $2.4 million for the December 2005 auction. There were no bids received and the only interest expressed was at a price of $1.5 million, which the plaintiff did not pursue.
65 As was argued for the plaintiff, had it accepted an offer at that level in 2005, in the face of the advice it had received as to the market value of the property, the defendants would have had a proper basis for complaint, that their interests had been sacrificed. While both Mr and Mrs Belramoul claimed that an offer for $1.8 million had been received after auction and rejected by the plaintiff, it was the unchallenged evidence of Mr Yates, a director of Ray White Neutral Bay, that there had been no such offer. Mr Smith also denied that there had been such an offer, or that Mrs Belramoul ever suggested to him that such an offer should have been accepted.
66 When the property did not sell, the plaintiff put it on the market at $2.2million. The property was listed on four internet sites; advertisements appeared in the Sydney Morning Herald in January 2006; a ‘For Sale sign remained on the property until the end of March 2006 and an 'open house' was conducted on Saturdays. Mr Smith spoke to the Ray White agency every Tuesday.
67 On the evidence, the plaintiff became dissatisfied with the failure of Ray White Neutral Bay to attract any offers for the property. When asked to advise on a further strategy to sell the property, in February 2006 Ray White advised the plaintiff that the price which the property might achieve in the market might only be $1.5 to $1.6 million. The plaintiff was disappointed with this advice and then took further advice in March 2006 from Savills Real Estate (‘Sails’). The estimate received was that the property would fetch a price of about $1.5 million and that an advertising campaign of some $16,710 should be undertaken.
68 At the end of March the Ray White agency was terminated and the for sale sign taken down. Mr Smith said in cross examination that while no decision was then taken to cease marketing the property, no other agent was appointed. The plaintiff regarded the advice it was receiving to be contrary to what it understood the value of the property to be, so another valuation was commissioned from Woodbury Bell, who advised in May that the market value was $1.5 million. Because it was at such a lower level than that provided by Smart Valuation the preceding November, a third valuation was obtained. In July, Landsburys Valuation advised a value of $1.56 million. Mr Smith explained that this course was adopted because the plaintiff wanted to take the time to determine what the property was then worth. It proposed to reconsider a marketing programme, once it had fresh valuation advice.
69 As events unfolded, no further marketing campaign was implemented. In June 2006, Mr Smith was approached by the defendants and was then engaged in ongoing negotiations, as to the purchase of the property by Mr Belramoul’s brother, at a price of $2.2 million. Those negotiations proceeded on the basis that the defendants were also to be released from what they owed the plaintiff. A deed of release and other documentation was prepared and in July the plaintiff was shown a copy of a cheque for $10 million made payable to the Belramoul Group Pty Limited by Dragon Pacific Resources Co Limited, as well as other documentation. An appointment for exchange was made, but it finally did not go ahead, apparently because necessary funds were not secured.
70 In late June 2006, the plaintiff was approached by the G Group Pty Limited and in July a contract for $1.8 million, was provided to its solicitors. An exchange failed to materialise, for reasons not revealed in the evidence.
71 In early September the plaintiff received an offer from the second mortgagee for $1.625 million, as well as another approach from the defendants. The plaintiff also received another proposal from Savills for appointment as agent, with a proposed advertising budget of $20,520. At that stage, the plaintiff had already received the second mortgagee’s offer and instead of implementing a further marketing campaign, it pursued negotiations with the second mortgagee. On 10 October a contract was issued for $1.625 million.
72 On 26 October, Mrs Belramoul telephoned Mr Smith to advise that the defendants had another party interested in the property at $1.6million, subject to no further action being taken against them. His advice was that the plaintiff already had a higher offer and that it would not agree to a release, at that price. He suggested that they submit a proposal for Board consideration, which would need to be much higher than $1.6 million and closer to the $2.2 million earlier discussed, if a release was to be given.
73 Mr Smith then spoke to Mr Donaghay on 3 November, who advised that he was prepared to pay $2.2 million, conditional on the defendants being released. He proposed an exchange on 10 November, with a 5% deposit and a 6 week settlement period. On 8 November, Mr Smith advised that the plaintiff was prepared to agree to those terms, but no firm offer emerged. Correspondence from Mr Donoghay’s solicitors was sent, advising that he was not in a position to proceed and required a further 7 to 14 days. On 14 November, the plaintiff agreed to an exchange with Mr Donaghay on 10% deposit, before receipt of the contract from the second mortgagee. Despite ongoing discussions with Mrs Belramoul, no formal offer was made by Mr Donaghay, as had been promised.
74 On 7 December, the amount outstanding under the loan was $2,296,276.22. On 11 December, the second mortgagee advised the plaintiff that it was in a position to exchange and the time fixed was for 4pm on 12 December. Mr Smith again wrote to the defendants and spoke with Mrs Belramoul, who assured him that Mr Donoghay would be in contact and was in a position to proceed. Mr Donoghay however advised Mr Smith that he was not in a position to proceed; he could not commit to any timeframe and could not put down any money, but required another week ‘until he had the Chinese connection tied up’. Mr Smith advised that in the absence of any concrete proposal, the plaintiff would proceed with the sale to the second mortgagee.
75 Mr Smith then spoke again to Mrs Belramoul who asked what would be required to delay the imminent exchange. His advice was that he could not make recommendations, but a proposal involving at least a deposit of some kind to show goodwill and an intention to settle, might be considered by the Board. On 12 December, Mrs Belramoul told Mr Smith that Mr Donaghay expected to be in a position to proceed by 20 December, but was not in a position to pay a deposit of any kind. Mrs Belramoul asked for a further week’s delay, so that the defendants could try to finance a deposit. Mr Smith asked for a written proposal to consider. None was provided and on 13 December contracts were exchanged with the second mortgagee.
76 On 7 May 2007, Mr Belramoul wrote to the plaintiff advising that he would be in funds and able to discharge the mortgage by 15 May 2007 and asked that the plaintiff hold off on an exchange. The exchange had already occurred in December.
77 The defendants argued that the plaintiff failed in its duty in two respects. Firstly, in failing to market the property in accordance with the real estate agent's advice. It was submitted to be unarguable that had such sales activity been engaged in, a higher price would have been secured for the property. Secondly, that the defendants failed to engender necessary competition between the prospective buyers, because it did not offer the property to Mr Donaghay on the favourable terms offered to the second mortgagee.
78 There was real difficulty with the case advanced. It cannot be overlooked that while there was no complaint by the defendants about the marketing activities undertaken up to March 2006, yet they garnered no offers at all. That does not support a conclusion that had such activities continued, a price higher than that paid by the second mortgagee, would have been paid by it or someone else. The only interest ever expressed in the property while it was being actively marketed was at some $1.5 million. The defendants do not complain about the plaintiff's failure to pursue that interest, but argue that had further marketing activities of the same kind been undertaken after March 2006, at a price of $2.2 million, a sale at a higher price than was achieved would have resulted. I can see no basis in the evidence for such a conclusion.
79 What the evidence shows is a falling market from 2004, when the property was valued at $3 million. Given the advice on which the plaintiff was acting in late 2005 and early 2006, namely that the property was valued at $2.1/2.2 million, that it did not proceed with a marketing campaign with Savills in April 2006, when it advised that the property would then only command a price of $1.5 million, was understandable, it seems to me, consistent with its obligations to the defendants. The only interest that the property had engendered to that point had been at $1.5 million, but no offers had been received. The plaintiff sought further valuation advice. The two valuations received confirmed the Saville opinion that the market value of the property was $1.5 million. The plaintiff then engaged in negotiations with Mr Belramoul’s brother, at a price of $2.2 million. That the plaintiff failed in its obligations to the defendants by not conducting an active marketing campaign at that stage, was not established. To the contrary, then spending further money on marketing, could have justly been criticised.
80 After the negotiations at $1.8 million fell through, a further proposal was put by Saville in September 2006, which envisaged another auction in December 2006. That the market value of the property was then more than the $1.625 million offered by the second mortgagee was not established. Nor was it established that then embarking on another marketing campaign would have resulted in a higher price.
81 In the circumstances, the plaintiff pursuing the various approaches which it received in 2006 at $2.2 million, $1.8 million, $1.625 million and $2.2 million, rather than spending up to $20,000 on further marketing activity, when it was expected that the property would achieve only some $1.5 million in the market place, does not establish any lack of good faith, or any failure in its duty to the defendants.
82 None of the amounts for which the plaintiff was negotiating the sale of the property in 2006 would have involved any sacrifice of the property, contrary to the defendants’ interest, given the repeated advice which the plaintiff received that the value of the property had fallen to some $1.5 million. The defendants’ argument that the plaintiff should have appointed a real estate agent in April 2006 and kept the property on the market at a price of $2.2 million, which reflected the Smart Valuation advice in November 2005, simply makes no sense in the face of the fact that the only interest in the property to that point had been at a price of $1.5 million and the two further valuations obtained in May and June 2006, where the plaintiff was advised that its market value was then either $1.5 million or $1.56 million.
83 The plaintiff had no obligation to sell the property at any particular time. The evidence did not establish that engaging a real estate agent on the basis claimed by the defendants, would have resulted in a price higher than the $1.625 million for which the property was sold in late 2006. There was no evidence that the property then had a higher market value.
84 Nor did the failure to negotiate with Mr Donaghay on the same terms as were agreed with the second mortgagee, establish that the plaintiff failed in its duty to the defendants, by failing to engender competition. On the one hand, the plaintiff was negotiating a sale of the property to a purchaser, the second mortgagee, which would have left it free to pursue the defendants for the balance of what was owing under the loan. On the other, it was negotiating with a friend of the defendants, Mr Donaghay, a sale which would have released the defendants from what they owed.
85 True it is that in December 2006, the plaintiff negotiated favourable terms with the second mortgagee, finally exchanging on the basis of a deposit of $1,000 from the second mortgagee, with the balance to be paid only on completion and a delayed exchange in February. Nevertheless, the plaintiff was also prepared to entertain taking a deposit from Mr Donaghay and delaying an exchange, even on 12 December, when the second mortgagee was ready to exchange. Mr Smith invited a proposal for the Board to consider, but none ever emerged. Mr Donaghay plainly held to his advice given on 11 December, that he was not prepared to pay any deposit, until he had finalised his long delayed funding arrangements, with his Chinese connections. The defendants sought an opportunity themselves to pay the deposit, but failed to put any proposal to the plaintiff, which it could consider.
86 While Mr Smith agreed in cross examination that the negotiations with the defendants were on more stringent terms than those conducted with the second mortgagee, that in adopting that attitude, the plaintiff was failing in its obligations to the defendants was not established. As Mr Smith explained, the offer from the second mortgagee was accepted as an offer at a reasonable market value for the property. What was being negotiated with the defendants was a different matter, namely, what the plaintiff was prepared to do for the defendants, by way of debt forgiveness.
87 In any event, the evidence certainly suggested that had any offer capable of acceptance been made by Mr Donahgy, the plaintiff would have entertained it. That was consistent with its approach to the defendants throughout 2006, even after the negotiations with the second mortgagee had concluded and when it was ready to proceed. The evidence did not establish that even if the same terms as to a small deposit and a delayed settlement had been offered to Mr Donaghay, rather than inviting a proposal from him, that he would have been prepared to proceed. His advice to Mr Smith was that he would pay no deposit, until his ongoing negotiations as to his own finances had been concluded. They had not been finalised to that point. There was no evidence that they ever were. The evidence was not capable of making out the defendants' complaint that the plaintiff had failed in its duty to them, or that it had wilfully and recklessly sacrificed their interests.
88 Again, the evidence that about a year later the second mortgagee sold the property for $1.75 million provides no assistance to the defendants’ case, in the absence of any evidence as to the terms on which the property was sold, what steps, if any, had been taken, which might have affected the value of the property, or the then state of the market.
89 A departure from reasonable standards, of the kind discussed by McLelland CJ in Eq in Hawkesbury Valley Developments Pty Ltd v Custom Credit Corp Ltd (1994) 8 BPR 15,581 at 15,583, was not here established. Even if it could be concluded that the plaintiff had been negligent or careless, in not continuing marketing activities, with the assistance of a real estate agent after March 2006, as well as pursuing the various negotiations in which it engaged in the latter half of 2006, that it failed to take reasonable steps to achieve a proper price for the property, so as to have acted unconscionably towards the defendants, was simply not shown.
The price accepted from the second mortgagee
90 In Jenkins, the formal valuations there in evidence were regarded to have been ‘unpersuasive’, given that at auction, no bids materialised (at [36]) and that the evidence of valuations were ‘out of kilter’, with what in fact happened. There was also an absence of any up to date valuation at the time the property in question was restored (at [37]).
91 In this case, there was various valuation evidence, but none which dealt with the position when the property was sold in December 2006. Part of the defendant’s complaint was that the property was finally not sold ‘in the market’, because the plaintiff failed to engage anyone to market the property after March 2006, despite the advice which it then received in relation to how the property might be marketed. That is undoubtedly true. Instead, the plaintiff pursued negotiations with various interested parties, as I have outlined. What may not be overlooked however, is that the property was sold in December for the only price for which there was ever any offer capable of acceptance, $1.625 million, in the face of the advice that if marketed, the property would command a price of $1.5million and the advice of two valuers, that it was worth $1.5 or $1.56 million.
92 In Hadfield it was observed at:
- 14 Exercise of the power of sale is undertaken by a mortgagee in the interest of the mortgagee, although the mortgagee is confined to exercise of the power in good faith for the purpose for which it was conferred; the mortgagee cannot act for any extraneous purpose or bye-motive, and cannot sacrifice the interest of the mortgagor; to do so would be to depart from good-faith exercise of the power, and from the concept of a sale in the exercise of the power. The sale must bona fide be a sale, not a sacrifice, and the mortgagee cannot be indifferent to the price provided only that its debt is paid. In the pursuit of its own interest the mortgagee is entitled to choose the time at which it sells the property.
93 Did the evidence establish that there had been any such ‘sacrifice’?.
94 The negotiations with Mr Donaghay were for $2.2 million, on a basis which would have released the defendants of their liabilities to the plaintiff. They then owed the plaintiff more than that sum, so that a sale on those terms, would have involved compromise on the plaintiff’s part. Despite extensive and ongoing negotiations, no offer ever finally emerged from Mr Donaghay. Selling the property to the second mortgagee for the sum of $1.625 million, certainly left the defendant free to pursue the defendants for the rest of what they owed the plaintiff. Nevertheless, the evidence did not show that the price accepted sacrificed the defendants' interest in the property. On the evidence, $1.625 million was a price which was above its market value.
95 The defendants claimed that they had suffered a loss of $575,000, as the result of the sale. This was the difference between $873,296, (that being the difference between what was owing under the loan, $2,498.296 and the sale price of $1.625 million) and $298,296 (that being the difference between the total debt and a sale price of $2.2 million). $2.2million was the price which the defendants claimed the property ought to have been sold at, by a marketing campaign. They relied on the November 2005 valuation which the plaintiff obtained and the price at which it was marketing the property up to the end of March 2006.
96 I am satisfied that the defendants did not establish such a loss. They did not establish either any failure in the plaintiff’s obligations, or even that if it had acted as the defendants claimed it ought to have done, that a sale price of $2.2 million could have been achieved. On the evidence, the property simply did not have that value when it was sold. The only interest at that price was by those with a connection with the defendants, who were seeking a release of the defendants’ liability to the plaintiff.
97 In 2005, contrary to the views of Smart Valuation and Ray White, the real estate agency James S Lindsay had estimated that the property might achieve a price of only some $1.4-$1.5 million. Given that the only interest expressed up to March 2006 was in the $1.5 million range and the advice of Saville and the two valuers in 2006, that the property would then only achieve a price in the $1.5 million to $1.56 million range, it may not be concluded that the price of $1.625 million accepted by the plaintiff later in 2006, was a sale at les than market value, involved a sacrifice of the defendants’ interests, or that a price of $2.2 million could have been achieved, had the property been marketed the plaintiff's claim it ought to have been.
98 The evidence that the property was sold in 2007 by the second mortgagee for $1.75 million, further underscores that conclusion. Perhaps there had by then been some recovery in the market. That, of itself, does not show that the property had the value which the defendants claimed in 2006.
Orders
99 For the reasons given, the plaintiff must have the orders sought, namely judgment in favour of the plaintiff for the amount outstanding on 1 May 2009, namely $1,179,744.97, plus interest on that amount since that date, in accordance with the Uniform Civil Procedure Rules and costs. I order accordingly.